Are Employee Referral Programs Worth It?

Organizations looking to hire often turn to employee referrals as a way to drum up job candidates. According to the National Organizations Survey, more than a third of workplaces frequently do so. But what exactly are employers getting when they tap the social networks of their employees? Beyond a cheap way to spread the word about openings, the hope is that current workers know something about what their organization needs and will recommend well-suited and productive workers and reinforce their employer brand. Yet that may not always be the way things play out.

Sociologists and other researchers have long studied how job referrals help jobseekers—research on how organizations benefit is sparser but growing. In one of the field’s classic studies, sociologists Roberto Fernandez, Emilio Castilla and Paul Moore delved into the hiring records of a bank’s credit card call center and found that applicants that came via referral had more appropriate backgrounds for the jobs they applied to, implying that referrals helped find good matches. A study of retail bank branches by Fernandez and Nancy Weinberg also found that referred applicants had more appropriate resumes than non-referrals, and that referrals were more likely to apply in months with fewer applicants, suggesting that employees recruited when the firm most needed them to.

But the call center study also found that referrals didn’t know more than non-referrals about the company in terms of things like its pay scale and need for full- vs. part-time workers. The researchers concluded that referred candidates were better suited to open jobs not because employees passed along useful information, but because employees told people like themselves about open positions—social networks tend to contain similar sorts of individuals, after all. While that may help when it comes to landing the right applicants, it could also work against workplace diversity. Indeed, a recent study by researchers at the Federal Reserve Bank of New York found that in one mid-sized corporation, 64% of referrals had the same gender as the person doing the referring and 72% had the same ethnicity.

Another question is whether people who get hired from referrals are more productive workers. Studies offer mixed results. In another look at the call center data, Castilla found that referrals hired into customer service positions were initially more productive, as measured by how quickly they completed phone calls with clients, but were practically no different from non-referrals on metrics such as courtesy and accuracy, and that over time the performance of the two groups converged. Castilla concluded that the social dynamics of the work environment—like having a friend at the office on day 1— mattered just as much as individual tendencies to be productive, especially since the call-center work was fast-paced and high-stress.

Research shows that social factors also matter for another outcome employers tend to care about: worker turnover. Multiple studies, including some using national data, indicate that employees who come via referral are less likely to quit, ostensibly because referrals have social as well as an economic bonds to their workplace. In their investigation of a mid-sized corporation, Federal Reserve researchers Meta Brown, Elizabeth Setren and Giorgio Topa found that referred workers were about 85% as likely to leave the company as non-referrals. That effect, though, changed based on the type of job, with support staff showing the tightest link between referral and tenure. As staff level increased, the effect diminished, and at the executive level, referrals were actually more likely to leave.

Data from the call center studies add another wrinkle. In that setting, referrals and non-referrals were just about as likely to quit, but referral quit rates were lower as long as the person who had done the referring still worked at the company. Again, the social nature of employee referrals resonated beyond the initial hire. That said, larger-picture dynamics can trump inter-personal ones. In the study from the Federal Reserve researchers, which included data from 2000 through the first half of 2011, economic recession changed turnover dynamics dramatically. While non-referrals were more likely to quit than referrals before the Great Recession, as soon as the slowdown hit, that difference disappeared. Anyone with a job held onto it.

At the end of the day, are employee referral programs worth it? Based on the existing research, it’s tough to answer a resounding yes, although considering how cheap referral systems tend to be, they don’t seem to carry too much of a trade-off—except perhaps for organizations looking to bolster workforce diversity. What is clearer is that referrals play into the social dynamics of workplaces. If social network connections mean that workers are more productive and less likely to leave, then the implications for workforce management go far beyond the recruitment stage.